Gifting mutual fund units has long been a complicated process for investors, both in terms of taxation and logistics. With recent changes, however, the system has become significantly more convenient. But one key question remains: How are mutual fund gifts taxed, and who is liable?
A common question among investors is whether receiving a mutual fund gift creates any tax liability. This concern is natural—everyone wants clarity on who is exempt from tax and who might be liable when mutual fund units are gifted.
Who is exempt from tax on mutual fund gifts?
Chirag Muni, Executive Director, Anand Rathi Wealth, while sharing his insights on gifting mutual funds, explained that Section 56(2) of the Income Tax Act plays a key role in determining taxability. This section illustrates clearly who are ‘relatives’ and the ones in this categorisation are totally free of taxes on the gifts.
5) Ancestors and descendants in direct line
In case someone gifts mutual fund units to one of the above-listed people, then neither the one who gives nor the one who receives will owe taxes. Both sides are completely exempt.
When does tax apply?
If mutual fund units are gifted to anyone outside this list of defined relatives, and the value of the gift exceeds Rs 50,000, then the recipient becomes liable to pay tax on it. This is commonly referred to as the ‘gift tax’. The donor, however, does not incur any tax liability in such cases.
Capital gains tax does not apply
Another important point clarified by Muni is that transferring mutual fund units as a gift is considered a transfer, and not a redemption. Therefore, because of this distinction, capital gains tax does not apply to the donor while gifting.
How did the earlier system work?
Before the new system was introduced, gifting mutual fund units was inconvenient. Investors had only two choices:
1) Convert physical units to Demat, open a new Demat account if required, ensure the recipient also has a Demat account, and complete an off-market transfer—a process that could take 15 to 20 days.
2) Sell their own units, transfer the cash to the intended recipient, and let the recipient repurchase mutual funds. However, this method could trigger capital gains tax for the donor.
‘New system makes gifting easier’
According to Muni, all these complications have now been eliminated. Under the new system, individuals can directly transfer mutual fund units to their relatives, making the entire process faster and more convenient.
